A Client’s Question: “Where is the safest place for me to invest?”

This question is power packed with many different potential answers. At it’s core, this question is about risk. This question is “me” focused. The safest place for me to invest might not be the safest place for you to invest. What does the word safe mean? Does it mean I don’t want to lose any money today? Or, does it mean “I want my future to be safe”. At the root of most investor questions is some type of psychological unknown the client wants light shed upon. Since this question can cover both product and asset allocation, I will cover product for the moment.

In the financial world, there are many types of products you can purchase or invest in to achieve your goals. All of those products can be put into 5 buckets; stocks, bonds, cash, real estate & commodities.

The first product you can buy is an individual stock. Stocks represent ownership in a company and the return you receive is dependent upon the profit of the company you purchased. If you buy stock in Microsoft, then you are an owner of Microsoft. If Microsoft goes out of business, you lose all of the money you invested in Microsoft. Out of the five buckets, of course a stock would fall into the Stock bucket.

Next you can buy a bond. With bonds you are simply loaning your money to the government or to a corporation and they pay you interest in return. With bonds, if the company goes out of business, you are at least higher on the priority list to get money back over other investors. However, when investing in an individual bond, you still run the risk of losing money. The individual bond goes into the bond bucket.

Savings Accounts: Savings accounts are a cash bucket product and are offered by banks, credit unions and savings & loan institutions. Savings accounts offer a high amount of liquidity. If you need your money withdrawn from a savings account, you are able to walk into the bank or go online and withdraw your money. Due to the high liquidity factor, savings accounts won’t pay you much interest. To see a few available rates for savings accounts, click here.

Money market mutual funds are similar to savings accounts, but the value of money market mutual funds can fluctuate. The price of the money market is targeted for $1, but moves slightly throughout the trading day. Money markets are pools of money brought together by fund companies for the benefit of the account holders to try and achieve a return slightly higher than that of a savings account. A money market account offers liquidity, however you may have to wait a couple of days for money to transfer from your brokerage account to your bank account. Typically for our clients, the transfer is next day. The money market account goes into the cash bucket.

CD’s might be a bit trickier for most people. To many a cd is considered cash. However, if you look back at the definition of a bond, you will see the cd is similar. With a cd, you are loaning your money to the bank, the bank pays you interest, and when your cd expires you get your funds back. The only real difference between the bond and the cd is the cd is guaranteed. In most cases, the cd is FDIC insured. Wisdom Investments would categorize the cd to go into the bond bucket.

Next we have mutual funds. Mutual funds can be a bit tricky as there are many different types of mutual funds. For simplicity sake I will categorize the bond funds into four types: stock funds, bond funds, specialty funds & asset allocation funds. Stock funds would go into the stock bucket, bond funds would go into the bond bucket and allocation funds would hit all of the buckets. The specialty bonds would be focused on the commodities and Real Estate buckets. With most mutual fund portfolios you will have different types of funds that allow you to broadly diversify your money across the multiple markets available to you. With a mutual fund portfolio, you purchase multiple different types of funds and these funds have underlying securities that make up the value of the mutual fund. For example, if you have a large cap blend fund in your portfolio, you are investing in many different large companies like Microsoft, Coca Cola, & Google. When you invest in a bond fund, you are buying a portfolio of bonds that might include treasury bonds, municipal bonds, & corporate bonds. Within the mutual fund space you can also buy REITS which allows you to invest in real estate and you can buy commodity funds that allow you to invest in the commodities market. Exchange traded funds are similar to mutual funds but offer a lower cost since they are not professionally managed.

Fixed annuities are put together by insurance companies utilizing a portfolio of bonds. The insurance company buys bonds using your money and pays you a fixed return far below what they expect to yield on the bond portfolio. The trick is the insurance company guarantees your return while they bear the risk of the bond portfolio. In today’s market fixed annuities do not typically pay a high enough interest rate to warrant the length of time you will commit to the product. Fixed annuities are also a great way to achieve tax deferral and can be helpful in estate planning. Fixed annuities are part of the bond bucket.

Variable annuities are annuities that have an underlying portfolio typically consisting of mutual funds. The variable annuity company charges the clients for death benefits and guarantees while the client has some peace of mind with their investment. In my view, most variable annuities are too expensive and unnecessary for most clients. If a variable annuity is needed, it’s typically to help transfer a client out of an overpriced annuity that was purchased in the past. These products do offer a death benefit which guarantees a beneficiary would not receive less than a specified amount, but you pay for this feature. As I’ve mentioned in the past, I’ve seen clients paying almost 4% per year for one of these products! In the investment industry, there is a debate going on as to whether or not a portfolio can be sustained while distributing 4% of the portfolio every year. Imagine trying to withdraw 4% and pay 4% per year…..

At Wisdom Investments, we take a managed mutual fund approach utilizing a balance of conventional and academic based investment strategies. We believe having a diversified, low-cost, & changeable portfolio is in most investors best interests. The safest place for you to invest is the product with the risk tolerance that helps you strive towards accomplishing your goals. If you’d like to learn more about how we help you “Make Smart Decisions With Your Money”, please call us at 847-290-0753 or email me at jose@wisdominvestments.com.